A Wave of Short Sales

There are three segments to the real estate market: owners with equity in their homes, renters and owners that are still under water with their mortgage. Owners with equity typically bought in the past few years and have seen their properties appreciate or owners who bought before market values ran up and did not take out home equity lines of credit. Many of the renters are former homeowners that lost the ability to own, due to a short sale or a foreclosure after the market crashed. There are many homeowners that are still upside down in their mortgage but were able to hold on to their home. It can sometimes be determined if a homeowner is in an equity position (they owe less than the market value of their home), based on when they purchased their home and how long they have been there. Another factor is whether or not they took out a home equity line of credit when the values of homes peaked.

During the turbulent times of the recent past, many homeowners arranged for loan modifications in order to stay in their house. These loan modifications, for the most part, were not permanent. Many offered lower payments for five years and then stepped up to a higher payment after the fifth year. In most cases the principle balance remained the same; just the monthly payment was adjusted. Now that enough time has passed, many of these homeowners that had modifications are going to start seeing their payments go up and find that they still may owe more than their home is worth. Many of these homeowners will not have the ability to make the new higher monthly payments and according to a representative of one of the large mortgage lenders, they expect to see another wave of short sales in our near future.

In addition to the loan modification timeline coming to an end, another contributing factor to more short sales on the horizon, is the fact that 10 years ago when prices were climbing, many borrowers took out interest-only loans. These loans were popular because the monthly payment was interest only, and not amortized over 30 years with anything going to principle. The entire monthly payment was interest and the amount owed on the house never decreased. These loans were popular because owners had a lower monthly payment for the borrower. Most of these loans had a 10-year balloon, requiring them be paid off or refinanced in 10 years. Since the balance of these mortgages did not go down due to monthly payments towards principle and the principle balance was based on the value of the home before the real estate market crashed, many of these borrowers are going to be in a tough position as these loans mature. Most likely these homes will not have equity so that the borrower can’t refinance or sell the property, thus creating more short sales in the market.

The large lending institutions that made the interest- only loans are gearing up for this, and some are being pro-active and have new guidelines to streamline short sales for these circumstances. Many investors are going to easily approve short sales for borrowers with credit scores below 620 that are delinquent on their mortgage and eliminate the need for all of the documentation that has been common for short sales. This documentation includes: two months bank statements, two years tax returns, income and expense reports, paycheck stubs and a hardship letter. This will make the process smoother and easier for borrowers having difficulty with this situation. Borrowers with a credit score over 620 and are not behind in their payments will still be required to supply the documentation and prove a hardship to be approved for a short sale.

The banks are looking differently at short sales now. They realize we are no longer in a declining market and that by hanging onto the homes longer they are getting higher values. They want to see that the homes being short sold are being put on the market like a traditional sale would. For instance they want a sign on the property, have a lock box for ease of showings and they want it clean and in good showing condition so that they can get the highest and best price. Fannie Mae is starting at a higher-than-market price and working their way down and FHA is getting an opinion of value from a real estate agent and an appraisal to get the market value of their short-sale homes.

If you find yourself in this situation contact your lending institution and see what their policy is for handling short sales for loans that have been modified and interest-only loans that are becoming mature. Contact a real estate agent with short sale experience to help you sell your home this way. Unfortunately we have not seen the end of short sales in our market, but the good news is that they will be selling at market value and not dragging down prices.